Micro Loans for IRAs Will Help Americans Invest for Their Retirement

Here is a proposal which would help to partially solve the retirement funding dilemma that many Americans face. Most individuals and families of modest means have few extra discretionary dollars to spare for retirement investing. After they pay their monthly expenses for housing, food clothes, medical and the like, they have no money left for savings and investment. This is particularly true for young people starting out with relatively low incomes. But the sooner a person can start saving for retirement the more time compound interest has to work its magic. So it is imperative to get these groups saving for their retirement at the youngest possible age.

The program that we are proposing, called Micro Loans for IRAs, will enable young people and people of modest means to invest for their long-term financial security. The program works like this. Mutual fund companies, banks, and brokerage firms would make available low-interest micro loans from $250 to $500 to individuals. The first loan would be used to establish a standard individual retirement account (IRA). The loan money would never go directly to an individual in the form of cash or cash-equivalents thus ensuring the loan was used for its intended purpose. The investments of choice would include low-fee index funds, exchange-traded funds and life-style funds. But other appropriate investments could be selected.

An individual would be required to repay the micro loan in 12 to 18 months but could pay off the loan earlier. After a loan is paid in full, an individual could apply for another micro loan to be used to buy additional investments for an existing IRA. This process could be repeated again and again over many years so substantial amounts of money could be accumulated in an individual's IRA.

Experience with micro lending shows that repayment rates are over 90 percent so there is little risk for the lenders. But if an individual defaulted on a micro loan, shares purchased with that loan would be cancelled and sold to pay the debt. The lenders’ liability should be neutral because some loans will result in capital gains and others in losses. The willingness for young people to incur credit card debt may indicate that they would be favorably inclined to save through borrowing.

The program is simple to understand, simple to implement and simple to administer. And everyone wins. Individuals fund their retirement accounts, lenders gain new customers from which they would collect standard IRA fees and our country would be more financially stable.

Because of the simplicity of the program, it could be made operational in 18 to 24 months. We urge that key government, business, academic and religious leaders conscientiously review and evaluate this proposal.

Written by Richard Howard and John Gordon.

Posted December 6, 2006.